Owner-employees: workers united, or trading a cow for a handful of half-baked beans?

10 October 2012

The scheme as proposed is open to abuse

George Osborne’s plans to allow employers to trade employment rights in exchange for capital gains tax free shares in the firm will, the government claims, enable small and medium sized fast-growing companies to create a “flexible workforce”.

In Thompsons view, this has nothing to do with flexibility. It will simply allow employers to fire at will. The scheme as proposed is open to abuse because:

It allows the employer to operate a compensated no fault dismissal scheme of the type proposed by Adrian Beecroft.

Employers could abuse the scheme by dismissing an entire workforce and imposing it as new terms and conditions on re-engagement.

There is no reference to safeguards for employees such as those that exist for compromise agreements where there is a requirement to seek independent legal and/or financial advice.

It is unclear whether the ‘redundancy cover’ that could be surrendered is unfair dismissal during a redundancy process, or the entitlement to a statutory redundancy payment in the event of dismissal by reason of redundancy.

Employers may be able to exclude day one unfair dismissal rights (such as for reasons connected to pregnancy, taking lawful industrial action, for requesting flexible working and for whistleblowing) as well as rights a new employee wouldn’t acquire for 2 years.

How will the scheme work with the flexible working rules?

It is not clear if employees are entitled to cash in their shares when they leave the firm or even before.

Employees or former employees cashing in their shares could cause cash flow problems for companies. Using national statistics, if everyone who left a job held £2,000 of shares and was entitled to cash them in that would amount to a cost to business every year of:

£4.8bn for the voluntary leavers;

£11.4bn for the involuntary leavers; and

A total of £16.2bn.

Even if only 2.5% of the total took up the share options the figures are still:

£120m for the voluntary leavers;

£285m for the involuntary leavers; and

A total of £405m.

Shares only exist for limited liability organisations. This scheme cannot therefore apply to unincorporated partnerships, or sole traders, which many SME’s are.

If most shares are not publically listed there will be issues surrounding:

Valuation – could result in either collateral costs of accountancy (to be fair) or arbitrary valuation by employers.

Voting rights – to be truly ‘owner-employees’ the share would have to have voting rights. Existing shareholders would see their voting power watered down. Will individual entrepreneurs be prepared to cede control to employees when their own personal finances underpin the business?

Transferability – private firm Articles of Association often have restrictions about who shares can be sold to. It might be that an employee finds that they are only able to sell to a handful of people, none of who want to buy them (especially if they carry no voting rights), meaning they are worthless.

If there are disputes relating to the shares. The employment tribunal is unlikely to have jurisdiction.

Given that £2,000 (the starting value for shares) is about 4 weeks pay for an employee on the national median salary of £26,000 there is unlikely to be much take-up of £50,000 shares. They are likely therefore to become a form of remuneration for the highly paid.

Shares are effectively worthless on insolvency. Any employee in those circumstances will presumably be unable to seek a remedy from the Redundancy Payments Office (RPO).